Mastek Q1 FY27 earnings call

Mastek reported Q1 FY27 revenue of $104.8 million, a sequential increase of 1.2% (1.8% in constant currency). In INR terms, revenue stood at ₹985 crore, growing 5% sequentially and 7.7% year-on-year. Operating EBITDA was 15.4%, impacted by various factors. The company achieved a PAT of ₹105.9 crore, representing 10.6% of total income, with basic EPS at ₹34.2 (up 14.8% YoY) and diluted EPS at ₹33.9 (up 15% YoY).

The 12-month order backlog continued its strong performance, growing 25% year-on-year in INR terms and 13% in constant currency, reaching $310 million. This growth was bolstered by a significant $25 million AI transformation deal in Salesforce Agent force in North America, one of the largest deals in recent quarters. Management noted a consistent improvement in the overall pipeline, with a good increase in large deal opportunities across geographies.

The UK business, a foundational segment, grew 3% quarter-on-quarter in constant currency terms. North America also showed positive momentum, growing approximately 2% QoQ in constant currency and 6% in INR, driven by strong order book performance. Conversely, the Middle East business faced severe headwinds due to geopolitical instability, leading to increased bench costs and delayed collections, which impacted overall EBITDA and business predictability.

Mastek is strategically positioning itself as an AI transformation company, with AI-led initiatives driving new demand across verticals. The data, automation, and AI business service lines collectively grew 9.8% sequentially. The company closed over 40 new opportunities backed by AI-led initiatives this quarter and is actively engaging both existing and new customers with AI-focused solutions, leveraging its enterprise application, data, and engineering practices.

Operating EBITDA for Q1 FY27 was 15.4%, experiencing pressure from the Middle East situation (delayed collections, bench costs) and a provision for doubtful impact. Additionally, utilization, excluding trainees, decreased by 2% sequentially due to order pushouts. Management anticipates further EBITDA impact from Q2 onwards due to ESOP grants ($400,000-$500,000 per quarter) and planned wage increments, but aims to mitigate these through internal cost efficiencies.

The UK public sector business remained stable, growing 7.9% sequentially, despite political leadership changes. However, the Healthcare sector, particularly in the UK, saw a transition in Q1 with some projects ramping down, leading to a 4% QoQ and 12% YoY decline in revenue from top 5/10 clients. New data modernization projects are starting, and management expects the Healthcare vertical to ramp up from Q2. Pricing competition remains aggressive, with discounts generally around 15%, and up to 20-25% in some cases.

The company maintained good cash collection, realizing $116 million from customers and keeping Days Sales Outstanding (DSO) at 75 days, despite a slight increase of 2 days due to pushouts and AMEA headwinds. Mastek generated positive operating cash of ₹27 crore and improved its net cash and investment position by ₹200 crore over the last two quarters. An income tax assessment for FY23 added ₹123.5 crore to income (tax impact ~₹31 crore), for which an appeal has been filed.

Mastek is undergoing an internal business transformation, adopting a 'Customer Zero' approach to implement AI-led solutions within its own operations. This includes replacing core systems with AI-native solutions to improve recruitment cycles, win predictability, and cost efficiencies. The company is also investing in transforming its talent pool from engineering to forward-deployed engineering and domain consultants, with some deployments already active in projects, aiming to become an outcome-focused organization.